Real estate hold/sell analysis or Real Estate Analysis can be defined as the process of analyzing whether to continue owning a real estate asset or whether to sell the property and reinvest the sale proceeds in some other investment opportunity. This process is a routine practice for real estate professionals like realtors, real estate portfolio managers, etc. it helps in optimizing the investment portfolio to its full potential and reaching the set targets.

But how do you decide whether or not it is a good idea to hold on to an asset? What if you make the wrong decision? And what are the various steps involved in making the decision?

The real estate analysis involves the financial analysis and comparison of various relevant metrics such as Internal Rate of Return, Equity Multiple, etc. for each possibility side-by-side. The outcomes of this comparison are then studied in detail and on the basis of it, a decision is to be made.

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Is Real Estate Analysis Necessary?

Let us take an example here. For instance, let us that that you own an apartment valued Rs. 40,500,000. You decide to conduct a levered IRR and equity multiple for the next ten years, based upon its current value, keeping the discounted cash flow as zero. The outcomes of this analysis are such that you get a projected return of 10% and an equity multiple equivalent to 1.80X.

Now, let us assume that there is yet another apartment that you are interested to invest into. You go ahead and conduct a discounted cash flow analysis of this prospective property of interest, on the basis of the current value of the apartment, which is Rs. 40,000,000. With the set purchase price, the results indicate a return at 12% levered IRR and 2.00X equity multiple for the upcoming 10 years.

It is clear from the comparative analysis that selling your existing real estate asset and reinvesting in the other prospective apartment is a better deal than holding on to your existing property.

This case study is a perfect example of the importance that real estate analysis holds in determining the fate of your investment portfolio. It is important for the evaluation of the financial security attached to an asset with respect to flow of money with time.

It is important to help you realise the full potential of your money and attached assets. The real estate analysis will help you in making smart decisions which will do wonders for your investment portfolio as well as your income.

The real estate analysis also gets you better acquainted with the real estate industry. You become both calculative and intuitive when it comes to taking investment decisions.


Real Estate Analysis

How to Conduct a Real Estate Analysis?

Now that you have understood the importance of conducting a real estate analysis, the next key step is to know that how to actually do it. So let us discuss in detail all the various steps involved while performing a real estate analysis.

It may seem to be a complicated process in the beginning, however, once you get the gist of it, it is not that difficult to understand. Before you start, you should be well-equipped with all the required information such as the value of your property and the prospective property of interest, the income flow for both the properties over the next ten years, etc. Market research and analysis are therefore, two important pre steps while conducting a real estate analysis.

First and foremost, you need to pick a financial analysis model that fits you needs. There are many discounted cash flow models available these days which you can employ to do your hold/sell analysis. Now, let us look at what is the involved procedure involved in these models.

Here, we are using the All-in-One model, a real estate DCF, for performing the analysis. Let us take a closer look at the operational procedure of the All-in-One model. For making your real estate analysis, you need to follow the below mentioned steps:

  • First, you need to model the prospective/ alternative real estate investment opportunity that you are interested in. Use your All-in-One model, take note of the most salient metrics involved in the decision making process.
  • Next, you need to model your existing portfolio asset. It is important to note here that the “acquisition price” should be set as the net cost of selling, that is, the amount that you would settle for if you were to sell the property at the current moment. The reason for setting the acquisition price as your net potential sale proceeds from the property today instead of the price that you paid for buying the property is that in case of the “hold” scenario, the selling cost of the property is your opportunity cost. It is the cost that you are choosing to bear by deciding not to sell the property.
  • The next important thing that you must keep in mind is to ensure that both the financing terms like interest rate, LTV, duration, etc., as well as the hold period are same for both the modeling scenarios.
  • The most important step is to carefully analyse and compare the two models. You must take into consideration all the important aspects of the return metrics while making the final decision. Do not forget that the decision is more than just the quantitative metrics. The metrics are but one factor that influence the comparison study. So, do not solely rely on the metrics, use your own judgement.

Just follow these few simple steps and reap the multiple benefits that real estate analysis brings you in terms of making smart investment decisions and utilising the full value of your money.

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The real estate analysis may seem like a complicated process in the beginning. However, it is crucial when it comes to important hold/ sell decisions for the real estate investment portfolio. It involves the comparison of various relevant metrics for analysing the various real estate investment deals.

The process is a regular business for real estate professionals such as asset managers, real estate finance advisors, etc. it mainly involves the study of important financial factors such as Equity Multiple, Internal Rate of Return, etc.

After analysing these factors, it can be evaluated whether it is wise to move on to the next investment opportunity or should you hold on to your existing asset. It is important for improving the cash flow of your real estate investments and realising the full potential of your assets.

It will help you keep all your real estate investments aligned and gain maximum profits from your assets. It also helps you in understanding the real estate industry in a better way.

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